Canada’s Clean50
Part 2 of 5: Financing the clean economy transition
Institutional and private investors worldwide have been encouraged to make their portfolios “fossil free” by distancing themselves from funds, stocks or bonds of petroleum companies. However, proponents of a lower-carbon future suggest that in addition to supporting renewable energy projects, investors should work with companies that most need to reduce their emissions. Getty images
The road to transition needs investors’ hands on the wheel
As countries and industries navigate the path to a low-carbon future, divestment campaigns urging investors to go fossil free sparked a conversation: what role should the financial sector play in the fight against climate change? While the “divestment” movement has gained some traction, many investors favour a different approach, one that relies on engaging with companies in all sectors of the economy to spur the transition and use investments to influence positive change.
“We can either take companies out of the portfolio, or we can use the portfolio to lower the carbon generated by our economy,” says Roger Beauchemin, president and CEO of Addenda Capital, a multi-asset investment firm focused on sustainable investing.
The idea of fashioning a low-carbon portfolio is commendable, but using engagement to assist in the transition can produce outcomes with significantly more upsides, he explains. “You’re using the portfolio to get results that are both financial and extra-financial.”
The three economic sectors most responsible for greenhouse gas emissions in 2018, according to Environment and Climate Change Canada, were oil and gas (26 per cent of overall emissions), transportation (25 per cent) and buildings (13 per cent). The oil and gas sector saw an 82 per cent emissions increase from 1990 to 2018, due in large part to the oil sands expansion in Western Canada.
Canada has committed to act against climate change and is aiming to achieve net-zero emissions by 2050. And under the Paris Agreement, the country made a goal of reducing emissions by 30 per cent below 2005 levels before 2030. This much is clear: tough choices and tough moves lie ahead.
The main carbon-emitting sectors account for all kinds of companies across the country, which means not only jobs are at stake, but the very livelihood of thousands of households and communities as well.
“The reality is that a lot of Canadian families and companies depend on achieving the transition carefully, and that it be well done and as quickly as possible,” says Mr. Beauchemin, who believes to do this, both hands need to be on the wheel, hence the idea of putting portfolios to work rather than divesting assets.
Over the past few years, institutions and individuals around the world have heard the argument that making a portfolio fossil free – by distancing themselves from funds, stocks or bonds to various degrees – is a way of moving towards a lower-carbon future. But investors should not leave the table where they can make their voices heard to companies who most need to reduce emissions. Bear in mind that petroleum products are crucial inputs for numerous industries and sectors, so many more stakeholders are required to act than is apparent at first glance. Also, only about 30 per cent of the world’s oil and gas supply comes from independent producers, who are often competing against state-owned entities not faced with shareholder pressure.
Mr. Beauchemin knows that skeptics will doubt the strategy of using the portfolio as a tool, but he says there’s a unique opportunity to alter the Canadian economy for the better. “That skepticism ensures there’s a thoroughness that comes with the actions that are expected,” he says. “An oil company can draw a greenhouse gas reduction plan for 2050, but there’s a need to go further, to dig deeper and help them to hit their targets. In short, we all need them to succeed.”
When the Expert Panel on Sustainable Finance published its final report in 2019, arguments for transition-oriented strategies came out front and centre. “Engagement allows asset managers to directly support companies on the path to competitive advantage in the transitioning economy,” it stated. “It is also an opportunity to hold constructive dialogue with companies particularly exposed to transition or climate risk before considering divestment.”
Among other things, sustainable investment should be promoted as “business as usual.”
There is momentum for a transition strategy that focuses on portfolios, says Mr. Beauchemin, and this needs to be supported more widely.
Sure, working on the transition by encouraging carbon emitters to improve their operations is the more challenging route for investors, but sowing those seeds will have a positive impact in the future, he adds. “We’re building the road ourselves; we know where we need to get to, but it’s going to be hard work and it won’t be a straight line. Our generation has to build it. After that, future generations of Canadians will be able to benefit.”
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